$1.8 Trillion Investment In Clean Energy In 2023 Highlights Importance Of Critical Materials

Society is moving toward decarbonization and electrification. At the same time, demand for electricity is rising as new middle classes emerge in countries around the world, and the power requirements of new technologies such as AI data centers increase. The importance of critical materials – mined minerals such as copper, uranium, lithium and nickel — in the global energy transition is growing. The mass adoption of sustainable energy sources, such as nuclear, solar, wind, hydro and geothermal energy, and rising demand for electricity are driving the supply and demand pressure for the raw materials necessary to create and maintain clean-energy technologies. 

For investors, the energy shift is no longer a future outlook, but a present reality – one that they can participate in by having exposure to equities that are economically tied to critical materials.

The Importance Of Critical Minerals

Critical materials, both metallic and non-metallic, are natural elements that play a pivotal role in the global economy. They are indispensable for the production of various products, including electronics, renewable energy technologies, aerospace, defense and medical applications. The critical importance of these materials stems from their economic significance and the associated supply risk. Key factors that render these materials vital encompass their limited availability, geographical concentration of production, vulnerabilities in the supply chain and the absence of easily accessible substitutes.

Given the importance of critical materials, companies that facilitate their global supply chain access are well-positioned to benefit from the increased investment in them. According to data from BloombergNEF's Energy Transition Investment Trends 2024, globally, $1.8 trillion was invested in the energy transition sector in 2023, which benefited many companies involved in the prospecting and refinement of critical materials for usage in clean energy technology.

Decarbonization: Global Commitment

In the global economy, the need to transition away from greenhouse gas has gained significant importance, as evidenced by the Paris Climate Accord and the 196 parties that signed the treaty, which covers climate change mitigation, adaptation and finance. Though the overarching aim of the treaty is to "hold the increase in the global average temperature to well below 2°C above pre-industrial levels" and "pursue efforts to limit the temperature increase to 1.5°C above pre-industrial levels;" the stark truth is world leaders have stressed the need to limit global warming to 1.5°C by the end of this century.

According to the United Nations’ Intergovernmental Panel on Climate Change, surpassing the 1.5°C threshold could lead to significantly more severe climate change impacts, such as more frequent and intense droughts, heat waves and rainfall. To keep global warming within the 1.5°C limit, greenhouse gas emissions must peak by 2025 at the latest and decrease by 43% by 2030. Nations around the world have committed to a goal of net-zero carbon emissions by 2050.

Simply put, the need to move away from fossil fuels sets the stage for elevated demand for critical materials for renewable energy. According to Bloomberg NEF, to meet net-zero targets, global investment may need to accelerate to a yearly average of $4.8 trillion from 2024 to 2030.

Critical Minerals Across Renewable Energy Generation, Transmission And Storage

Critical minerals are needed at every stage of the renewable energy value chain, as they underpin the conversion of primary energy, such as wind and solar, to consumable forms of energy. The roles and attributes of critical minerals within the renewable energy ecosystem include:

Generation: Uranium, Silver And Rare Earth Metals

For many, nuclear energy is viewed as a viable source due to its low greenhouse gas profile, and its ability to deliver the highest capacity, meaning that actual electricity production is close to its maximum potential output compared to other greener energy sources. Essential to nuclear energy is uranium; a very heavy metal that can be used as an abundant source of concentrated energy for nuclear reactors.

Silver is unique as a critical mineral due to its superior electrical conductivity profile. It ranks as the most conductive metal on Earth, even more than copper. Silver plays an important role in the solar energy sector and is used to help solar panels generate electricity. As the use of solar panels grows over time, industrial demand for silver is expected to expand significantly. The World Bank estimates that green technology demand for silver will double between 2017 and 2050, from 1.4 thousand metric tons to 3.2 thousand metric tons, driven primarily by solar panels.

Rare earth elements are a collection of 17 metallic elements that are essential in many high-tech products due to their strong magnetic properties. Rare earths play an important role in electric motors, with 90% of electric vehicles (EVs) using rare earths as part of their drivetrains. They help power the wheels of an EV — electric motors use the force produced when two magnets repel one another, causing the axle to spin rapidly and creating sufficient torque to turn the wheels. Without certain rare earths, this process would be very difficult to replicate. Rare earths are also critical to the construction of wind turbines, which rely on rare earths in significant quantities to create the same torque-generating magnet functionality.

Transmission: Copper

Copper's exceptional electrical conductivity and contribution to energy efficiency make it a critical element in energy transmission. Its broad market demand and versatility in use across many industries have historically positioned its price as a gauge of the global economy. As the global economy moves towards decarbonization and electrification, emerging clean-energy technologies require significantly more copper than traditional systems.

Storage: Lithium, Nickel, Cobalt And Graphite

Lithium plays a pivotal part in battery construction. The movement of lithium ions back and forth between the anode and cathode of a battery generates the free electrons in the anode, producing the actual charge at the positive end of the battery. That charge flows into a vehicle's motor or the electronics being powered.

The lithium market is of pressing interest to a world looking to replace internal combustion engine vehicles with EVs in the decades to come. Estimates put the global market for lithium at $7 billion in 2022, and some project that it will reach more than $22 billion by 2030.

As stated by the Nickel Institute, the major advantage of using nickel in batteries is that it helps deliver higher energy density and greater storage capacity at a lower cost. Further advances in nickel-containing battery technology mean it is set for an increasing role in energy storage systems, helping make the cost of each kilowatt-hour (kWh) of battery storage more competitive. Ultimately, this will allow energy derived from sustainable but intermittent sources, such as solar and wind, to be captured and stored more efficiently.

Cobalt is another mineral of critical importance to clean energy, used as a core component of cathodes in rechargeable batteries. Cobalt imparts thermal stability and high energy density to rechargeable lithium-ion batteries, which is key to the range and stability of EV batteries. It is one of the most costly components of a battery, and researchers have been hard at work trying to reduce the amount of cobalt in an EV battery – but it presently remains essential in battery design.

Graphite is another mineral critical to the design of lithium-ion batteries, specifically the anode – and each battery needs a lot of graphite. By weight, graphite is one of the largest components of an EV battery, accounting for 20-30%. And EV batteries are quite heavy, far heavier than ICE components, so the graphite weight is quite substantial. An average plug-in EV contains more than 115 pounds of graphite.

Energy transition demand for graphite is already climbing and is expected to grow somewhere between 750% and 2,500% by 2040, relative to 2020 levels, depending on how aggressive global players are about meeting 2050 net-zero targets.

The Broader Economic Landscape

While demand for critical minerals is partially driven by clean energy, there is also an economic imperative. Increasingly, governments are competing for critical materials for national security or to stimulate their national economy through domestic production of technological inputs used in clean energy. The ripple effect of this increased demand has also impacted commodity markets, catalyzing miners and production facilities that were underinvested to take renewed action and begin scaling production to meet anticipated future demand.

Gaining Exposure To Critical Minerals

Critical materials are essential to decarbonization and electrification. The Sprott Energy Transition Materials ETF SETM aims to capitalize on the growing demand for critical materials and its integral role in transitioning to a carbon-neutral society.

The ETF provides pure-play exposure to a broad range of critical minerals and mining equities essential to the transition to cleaner energy. These critical materials, metals and raw materials include uranium, copper, lithium, nickel, cobalt, graphite, manganese, rare earths and silver.

As reflected in Sprott's recent special report, A New Era: How Critical Minerals are Driving the Global Energy Transition, as EVs and clean energy technologies become mainstays in our global economy, the companies that reflect the value of critical minerals will represent real economic value and be a source of wealth-building for investors. Thus, decarbonization and electrification are not only about energy advancement but also an opportunity for wealth generation within an ecosystem focused on sustainability.

Featured photo by Chelsea on Unsplash.

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